Gaaitzen DE VRIES (University of Groningen)
The elasticity of trade to global GDP weakened after the 2008 crisis. Why? We extend the model by Bems, Johnson and Yi (2010, 2011) to account for changes in demand composition as well as in production fragmentation. Using deflated world input-output tables, we find that fragmentation has continued, notwithstanding anecdotal evidence of reshoring. It pushed up the trade elasticity before as well as after the crisis. The decline in the elasticity is mainly due to weak growth in the global demand for durable goods.